Don’t You Buy Me A Mercedes Benz

It's been an interesting several months, if not downright depressing. Watching the economy finally crumble under the weight of its own inflated numbers is like seeing someone die from alcoholism. It's painful, but you knew it was inevitable.

What's really scary is how close this economy is to suffering another long-term slide similar to the one experienced during the Great Depression. I don't say that for shock value, or to advocate the recent bailouts that have become all the rage in Washington. I mention the Great Depression because the similarities between 1929 and 2008 are too numerous and too obvious to easily brush off.

A study done by the Brookings Institute indicates that in 1929 the top 0.1% of the population controlled 34% of all savings, while 80% of Americans had no savings at all. One of the hallmarks of current U.S. consumer activity, the availability and use of credit, actually was first introduced in the 1920s. In four years, between 1925 and 1929, the amount owed by U.S. consumers more than doubled, from $1.38 billion to around $3 billion.

Credit allowed the economy in the 1920s to grow at an artificial rate. And in the last ten years or so, the irresponsible use of credit has again put us as a country into a perilous situation.

Simply put, credit creates bogus demand, allowing products that would not normally be sold to flood the marketplace. Eventually this catches up with the market and people stop buying the product at issue.

Today's auto market is a perfect example. When I was a kid in the mid 1980s more often than not every other car on the road was in some sort of decay, held together by bailing wire, duct tape, Bond-O, gum or whatever type of adhesive was readily available. You'd have more luck in the lottery than you would seeing a real live Corvette in traffic. But the vast majority of people in those cars owned them outright, or were well on their way to owning them outright.

Even through the 90s, this generally held true. My first car had 90,000 miles on it when I got it. My second car had 55,000 miles on it. To this day I've never owned a brand new car. Drive by a high school today and I'd say a good 50% of the cars in the lot are within three to four years old, if not brand new outright.

Traffic today looks like recess at the world's largest auto show. Now the car that is obviously fifteen years old is the sore thumb. We don't even blink at the number of new $40,000 SUVs beside us at the stoplight.

And today, with credit drying up, Detroit is finding out that people were buying cars they really shouldn't have been buying. You don't need a new car until the one you're driving is more expensive to fix than its book value.

Best Buy is seeing the same thing, but its suffering from the sale of high end electronics. HDTV is nice and all, but I don't need to spend $2,000 on a new television when the non-digital set in my living room works just fine. When people are worrying about making the ARM payment on their house, the need for a new 40" flat screen kind of disappears.

I'm not an economist. I don't understand a lot about the economy. But I know if I can afford something, and I know when I shouldn't buy something that will stretch me beyond my comfort zone.

It seems people are finally starting to become aware that money doesn't grow on trees. Maybe the idea will finally catch on. It's only been 80 years.

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